So you’ve decided to dabble in the world of crypto. But what is a cryptocurrency exchange, and which type is best?
Words: Rhys Thomas
Perhaps you’re trying to get rich and see dogecoin as the gateway to having more drip than the leaking tap in your student accommodation, owning cubes of solid tungsten and retiring early. Or maybe you’ve decided that you genuinely think crypto is the future and just want to HODL (Hold On for Dear Life) as part of the movement towards a decentralised system that challenges the economy as we know it.
Whatever the motivation, you’ve decided to get into crypto, which means you’re going to need to get clued up on cryptocurrency exchanges. What they are, why you need to use them, which one might be the best for you – loads of things. Well then, that’s where we can help you. Let’s get stuck in.
It’s a bit like eToro, if that helps. If it doesn’t: essentially, they’re online brokerage platforms. So like a stockbroker, who you’d phone and be like, “hey, buy me two shares of Microsoft” or whatever. But online. And they’re dedicated to crypto. Same process, though: you make an account, connect a payment method (your bank account) and then you can search for, buy, sell, and trade crypto coins and tokens.
All exchanges have their pros and cons. Some offer way more altcoins and tokens than others. Some are prettier to use. Some work well on mobile. Others might be more secure or have cheaper transaction fees. It all depends on what you’re looking to prioritise. The most popular exchange is Binance, which is almost 10 times more popular than the second and third most popular, FTX, and Coinbase.
Some have additional features like in-built wallets, staking, educational resources and more. They’re all generally less complicated to work with than owning a crypto wallet, so many people just keep their crypto on the exchange instead of sending it over to a dedicated wallet.
For example: in February 2021, it was estimated that there were 68 million wallets on the blockchain. Binance currently has over 90 million users.
You have centralised and decentralised exchanges. The most popular are all centralised. Again, there are pros and cons. A centralised exchange is one where there are people who work for the company. Coinbase is one of these, with a team of actual human beings who will manage transactions, have access to account information and be able to block or suspend transactions. A bit like you’d find at a bank, or places like eToro (which also deals with some crypto, actually).
The benefits are that you can access support if something goes wrong, say a forgotten password or a hack. Decentralised exchanges (sometimes called DEX for short) allow you to trade crypto in the same way, but instead of a central authority controlling transactions, there’s a smart contract.
Smart contracts, which are made on the blockchain, are like a contract that’s encrypted and coded so that it can’t be tampered with. What happens here is: you go to buy 1eth, for example, and the contract says: “OK. Then I need to send over (at the time of writing) £1,378.52 to the DEX.” If that comes out of your account, fine, and ends up in the other account, great. If anything dodgy seems to be going on, the transaction won’t go through.
A DEX also won’t make you give up any personal information while making an account (ID, a mobile number, an email address, etc.) whereas you’ll have to provide quite a bit of personal information for a centralised exchange. For many blockchain fans, anonymity is a huge part of the reason they use crypto, so that’s a big concern for them. There’s no support if something does go wrong, though.
These features mean everything is secure and basically impossible to tamper with on a DEX. It also means that you avoid issues with the company running a centralised exchange.
For example: if a centralised crypto exchange went bankrupt, or had a big technical glitch (this happened to Binance last year), you may find you don’t get your money back. The hassle with decentralised exchanges like this, though, is you can’t use fiat money. So that £1,378.52 would have to be another crypto coin like Bitcoin or Cardano or Solana, to name some of the most popular right now.
But also, in most cases, there’s only a small pool of crypto you can swap. Often, you can’t swap from one blockchain to another. So you can’t do Bitcoin to Ethereum, but you can do Shiba Inu (an altcoin on the Ethereum network) to Ethereum.
For most people, this is just a ballache. However, having no middle-person company also means that transactions happen quicker (because it’s all done through code) and that the transaction fees are able to be way lower – good for your bank account, sure, but perhaps hints at a dystopian future, like robots taking over the world.
Some would say that you should use an exchange purely to exchange things – but never as a wallet or place to store your crypto, especially if you’re using a centralised exchange like Coinbase or Binance. Why? Because of those potential security issues like a big hack, or a bankruptcy.
With a DEX, you have to use a form of wallet independent from the exchange. You can also send crypto from a centralised exchange into a wallet that’s kept decentralised as a sort of hybrid way of doing things.
An exchange is where you go to get your crypto coins and tokens. It’s also where you trade and sell them. They can be centralised, and this allows you to link up a bank account, use a mobile app that’s not gross, and other convenient things. Or you can have a decentralised exchange, which is more fiddly but also more “crypto” and secure. You can also send your crypto to a wallet.
They all boast different features, so it’s worth having a little look at a bunch to find the one that best suits your needs and temperament. Vibes and chakras, but make it crypto, innit.
Speak to a Financial Conduct Authority-registered financial adviser before taking financial advice, and think carefully before making any decision.
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